Do Lottery Gamblers Love Risk or Overweight Small Odds?∗

This paper considers whether lottery betting is best explained by risk-love or an alternative to the expected utility model, namely, the overweighting of small odds. To the best of our knowledge, we are the first to use the common setting of state lottery betting to investigate the fit of expected utility theory against an alternative model of non-linear probability weighting. Our results show that both expected utility with risklove and risk-neutrality with a nonlinear weighting scheme are consistent with observed data from state lottery gambling. Interestingly, the data prefer a specification that models the agent as having risk-averse preferences and overweighting the probability of winning the jackpot using a nonlinear weighting function.